State Owned Asset Sales Are An Unknown

The Supreme Court recently released a judgment that found partial privatisation of Mighty River Power would not stop the government from compensating Maori for any claims they might have under the Treaty of Waitangi in relation to water rights. This means that the sale of Mighty River Power can go ahead and the National government can chalk up a political win.

The problem with the judgment is that it did not change the fact that the world is still in turmoil. The Federal Reserve and other central banks have been pumping liquidity into the financial system and pushing up the prices of financial assets. The New Zealand sharemarket rose nearly 25% in 2012 and billions of dollars is flowing into the marketplace with Kiwisaver contributions and overseas investors building up stakes in NZX listed firms.

But are state owned enterprises really fit for an NZX listing? The financial troubles of Solid Energy should give potential investors in Mighty River Power cause for concern. The fact that a coal mining company could make a mistake with something as important as trends in the global coal price, leading to a massive increase in debt over a short period of time, is not at all surprising when we think about the incentives faced by state owned enterprises.

Because state owned enterprises are seen by bankers as government sponsored entities, they are in a position to engage in risky business and explore pipe dreams that private sector firms would only think about if a potential project could pass their “hurdle rate” or the rate of return on investment required to justify the opportunity cost of the firm’s capital.

The government held a press release once it became aware that Solid Energy was in financial strife, and did not rule out a bailout. With over 1,000 jobs at stake it is likely more taxpayer money will be spent even though $1.5 billion dollars has disappeared in value and therefore proceeds from state owned asset sales. That reduces the lower bound $5 billion dollar estimate to $3.5 billion dollars in a best case scenario.

It would be foolhardy to invest in any former state owned enterprise when surprises such as Solid Energy becoming worthless almost overnight can emerge. We do not know the power companies and all of the details of their fanciful overseas ventures. We do not know the details of their performance bonuses and accounting practices that could lead to a post-listing “oops”.

We are also in the dark with respect to what the Supreme Court judgment effectively greenlighted – compensation for the loss of rights in relation to water. When you add these variables in with the cost of paying investment bankers to handle the sale, potentially as much as $100 million dollars, we have no idea whether the grand plan of selling down state asset sales will achieve anything other than some vested interests benefiting from National government policy.

The Chairwoman of Genesis Energy, former Prime Minister Jenny Shipley, hasn’t been booted despite her involvement as a director of collapsed construction firm Mainzeal Property and Construction, owned by delisted NZX dog Richina Pacific. She said that she should be judged by her results for Genesis Energy but implying she had nothing to do with the collapse of Mainzeal. She hasn’t said anything about Mr Richard Yan, the controlling shareholder of the whole group.

The funny thing is, another Supreme Court judgment ruling that commercial building contractors could carry the can for leaky buildings led to the demise of Mainzeal as “last man standing”. When you add an alleged tendency to underbid on major contracts and an imported management structure of failed UK executives not used to operating in New Zealand conditions, it is hard to see why we should let her wash her hands of the Mainzeal collapse.

State owned enterprises haven’t had nearly as much scrutiny as comparable NZX listed firms like Contact Energy or Vector. We don’t know enough about them and don’t have enough of an open track record to make sure that investors aren’t being sold dogs. Do we really trust the National government to make sure that it doesn’t set up a situation where shareholders in partially privatised SOEs face a “Feltex Carpets” or “Air New Zealand” situation? It’s happened before. It could happen again.